Banks in existential fight but opportunities abound after fintech rout

Over the past decade, top incumbent financial services firms created $US1.3 trillion in new value, while listed ‘financial infrastructure and technology services’ firms delivered $US1.7 trillion. But firms outside the incumbents delivered more than $US3 trillion of new value in that period. This is creating a new competitive landscape.

“Ecosystem competition is the new landscape, where firms sit in each others’ value chains in simultaneous partnership and competition,” the consultants say.

The changes have been driven by slower growth in capital-intensive, risk intermediation services such as lending; these have grown at about 3 per cent per year over the last decade. This compares to faster growth in capital-light services linked to connected data services; these have grown at about 10 per cent per year.

Rising interest rates will change dynamics, the report acknowledges, with returns from lending expected to rise. But penetration of risk intermediation services “is mature, if not saturated, so the growth is akin to a rising tide lifting all boats, not new value creation as defined by new services to new customers”.

It’s not start-ups banks need to watch out for but tech companies like Square (now Block), Stripe, Circle and PayPal, who are moving into commerce, ‘embedded finance’, digital identity, digital wallets and digital currencies.

Oliver Wyman, which advises several Australian banks, said many are doing a decent job protecting their existing customers, increasing the quality of services through mobile apps, and digitising internal processes. But “the evidence is overwhelming that this is not moving far enough or fast enough,” it says.

“Incumbents have tremendous advantages, but as things stand today they bear a significant risk of being recast as highly regulated risk management utilities, delivering relatively stable if low earnings, with an equity story firmly anchored in cash-out.”.

Australian majors are experimenting with new strategies. Commonwealth Bank sees itself as a “platform”, offering various services to customers including in other industries such as energy; Westpac is providing ‘banking-as-a-service’ to start-ups to allow them to distribute its products.

ANZ, meanwhile, said as its half-year results it would create a ‘non-operating holding company’ (NOHC) to allow its technology assets to operate outside prudential regulation and be more nimble.

While “there remains some denial in parts of the industry” as many banks feel “constrained by complexity and regulation”, Oliver Wyman suggests incumbents “pivot their focus more decisively toward the big future sources of value growth” and “use the rising rate environment to go on offence”.

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